Organigram is one of Canada’s leading licensed producers of high-quality recreational and medical cannabis. The company was founded in 2013 as a medical cannabis provider. Now, it is working towards developing an international business partnership to be able to extend the company’s overall global footprint. After a lackluster earnings report, investors are worried about the long-term fundamentals of the company. In fact, CIBC analyst John Zamparo doesn’t see Organigram Holdings (NASDAQ:OGI) returning to positive EBIDTA anytime soon. He recently reduced his price target for OGI from C$5 to C$3.25. Organigram stock is down, but is it out?
Organigram’s Price Pressure
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Organigram Holdings released its data for the second quarter of 2021 on 13th April, after which the stock dropped from $2.91 to $2.47 where it is trading currently, a drop of over 15%.
Its net revenue fell to a CA$14.6 million, a drop of 37% from CA$23.2 million in the same period last year. The lower revenue is a matter of alarm for Organigram because the company’s top-line has been dropping consistently since hitting CA$26.9 million in the quarter ended February 28, 2019. Incidentally, that was the first full quarter of legalization.
Organigram has expressed that the fall in revenue was “due to significantly lower wholesale revenue and a lower average selling price in Q2 2021. The higher wholesale revenues during Q2 2020 were opportunistic in nature, primarily sales to a single licensed producer.”
Organigram also missed out on large sales opportunities because of COVID infections and quarantining in the team. The company was also unable to fulfil certain demand for its products totaling approximately CA$7 million in Q2 of 2021 due to production and processing constraints.
The lower revenue numbers caused a net loss of CA$66.4 million, an increase of 872% from its loss of CA$6.8 million in 2020.
According to CEO Greg Engel, the business was being “challenged by industry dynamics, COVID-19 and staffing limitations” at their facility. Thanks to a poor turnover, the company is operating out of a single facility in New Brunswick.
What the Future Holds for this Cannabis Stock
The results don’t look positive but the company believes things will turn around. They are expecting that Q3 of 2021 will be significantly better than Q2 “as the company is improving demand fulfillment with increased staffing.” Nonetheless, the target might end up taking a miss, in case COVID infections begin to resurface once again.
What happens to be a matter of concern for OrganiGram is that, in the last four quarters, the company has only managed to surpass consensus EPS estimates – just once. On April 6, Organigram announced that it acquired The Edibles and Infusions Corporation (EIC), a maker of cannabis-infused products which includes soft-chew edibles. “Edible products remain an important product category to Organigram and EIC represents an ideal partner with which to expand our market presence in this category as well as other derivative cannabis categories,” said Engel.
This acquisition will also allow Organigram to enjoy the services of a second operating facility along with having a strong footing in Western Canada. Soft chews are slowly becoming one of the fastest-growing edible categories and might turn out to be revenue booster for Organigram.
Along with this acquisition, tobacco giant British American Tobacco has also announced a collaboration towards a product development with Organigram. As per this collaboration, British American Tobacco will be taking a 19.9% stake in OrganiGram which will be an investment equivalent of around CA$221 million.
Organigram Stock is Down But is it Out?
Organigram is a low cost, certified organic, cannabis producer in Canada. They supply all 10 provinces with products. We believe they have strong management, based on experience in cannabis and related industries. The CEO comes from Tilray. Their cultivation capacity is impressive, currently at 89,000 kgs/year. They sell online and have over 16,000 active medical patients and they have interests in Australia, Germany, Serbia, Israel, and plan to sell South America. Additionally, the company ships medical cannabis internationally.
Its production costs are extremely low, despite having all indoor cultivation, which produces very high quality cannabis, usually at a higher cost. It generated net revenues of US$80.4 million last year with a net income of CAD$-9.5 million. Their losses are minuscule when compared to their competition.
Will its stock price improve from where it is today at US$1.56? We think so, but not until the end of 2021. Unlike Canopy and Aurora, they don’t splash their cash around and purchase companies left and right. They typically try to keep costs low, establish strong brands, and produce high-quality material. Because of this, they’ve lined up strong distribution deals with TGS, Pax, and Feather.
They are still completing their facility in Moncton with growing expansions to 113,000 kg/yr on hold (COVID) and a 56,000 sqft edible and concentrate facility coming online in 2021. They have plenty of cash on hand to continue executing their plans and if they keep cutting costs, producing and distributing their high quality products, and achieving their disciplined capital allocation strategy they should get through the tough, later part of 2021 just fine.
Organigram Stock is Down But is it Out?
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